Friday, October 08, 2010

"Reality used to be a friend of mine"

I have often thought that the relationship between academic economics and reality can appear tenuous not least when I am in sitting through another hard core theoretical economics seminar and the 23rd slide of complicated looking equations appears on the screen.

On a more trivial level I have always wanted to use "reality used to be a friend of mine" as a blog post title although I forget where this quote comes from now.

Harald Uhlig (Chicago) takes a look at this relationship in a non-technical way (phew). He looks at important issues not least whether economics is a "science" or an "art".

Economics and Reality

Harald Uhlig
University of Chicago - Department of Economics

September 2010

NBER Working Paper No. w16416

This paper is a non-technical and somewhat philosophical essay, that seeks to investigate the relationship between economics and reality. More precisely, it asks how reality in the form empirical evidence does or does not influence economic thinking and theory. In particular, which role do calibration, statistical inference, and structural change play? What is the current state of affairs, what are the successes and failures, what are the challenges? I shall tackle these questions moving from general to specific. For the general perspective, I examine the following four points of view. First, economics is a science. Second, economics is an art. Third, economics is a competition. Forth, economics politics. I then examine four specific cases for illustration and debate. First, is there a Phillips curve? Second, are prices sticky? Third, does contractionary monetary policy lead to a contraction in output? Forth, what causes business cycles? The general points as well as the specific cases each have their own implication for the central question at hand. Armed with this list of implications, I shall then attempt to draw a summary conclusion and provide an overall answer.


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